1 April 7 2015 Fundamentals of Investing Stocks tend to go up higher than other forms of investments Invest to make money build wealth have a positive return o When people lose money it affects them stronger than making money Invest to keep ahead of inflation make money beyond salary people are living longer worry about Social Security people feel like they have a part in the economy When are you ready o Stable life have an idea of your net worth have a regular savings plan low to no debt have an opt out employer sponsored retirement plan Four steps of investing 1 Setting goals developing investment attitude 2 Assessing risk and return a Investment horizon how long do you have to hold on to something before you can get money on it In most cases you can write off losses on taxes b c Yield has to do with bonds 3 Selecting investments and allocating assets a 80 of Americans have some sort of collection 4 Managing investments a How much how long when to sell Investing Strategies terms Tax shelter investment is tax free until you sell it Buying a bond will be tax free when you sell it Direct investment plan avoids broker goes straight to company Employee stock ownership plans get reduced price shares of your company o This can be bad because if the company goes under you can you re your job and your stocks If held longer than 12 m capital gains taxes are less Capital gains income from increased value of an investment Realized return actual return on investments Most start to invest around 30 Portfolio increase diversification lower risk Dividend Investment Plan DRIP automatic reinvestment of shareholder dividends to buy additional stock Direct investment plan investors buy stock directly from corporation Employee stock ownership employees buy stock in their company at reduced prices Stocks Ch 12 Common stock shares or units in a public corporation Proxy written statement assigning votes to another person Preferred stock shares that pay dividends have preference over common o Par value face value o Callable preferred stock allows the corporation to recall the stock 2 o Cumulative most common if dividends are passed they accumulate here and must be paid first o Participating preferred stock share in profits above declared dividend o Adjustable rate preferred stocks pay a dividend that is adjustable o Convertible preferred exchanged for a given number of common Dow Jones Industrial Average index of the 30 leading stocks o GE has been on there since beginning Standard and Poor s 500 Composite market index movement of 500 stocks NASDAQ index of fast moving technology and financial services stocks Russell 2000 small stock index measures stocks of small companies Wilshire 5000 equity index all US equities on main stock exchange Bull market market is up Bear market market is down Numerical Measurement of Stocks Book value assets liabilities number of outstanding stocks Price earnings PE ratio most important o Price of the stock annual earnings of the stock o Lower number means more conservative stable o 20 and over is a new business riskier Earnings per share portions of profit allocated to each outstanding o Profit shares Beta coefficient numerical measure of stock s volatility o Closer to 1 is less volatile Theories o Efficient market impossible to beat the market just pick stocks Market movement is random o Fundamental stock s real value is determined by future value jus o Technical based on trends and patterns in the market as a whole think about the future even more future Primary market market for purchasing new issues of securities Secondary market previously owned shares are sold Securities exchanges market where brokers rep investors who want to buy sell Over the counter OTC market stocks not traded on exchange o Executives buy and sell securities of corporations Language of buying selling Limit order buy sell at a specific rate Stop order Market order request to buy sell stock at the best price currently available Discretionary order clients and execs work together as a team Round lots shares in multiples of 100 Odd lots less than 100 shares 3 Long term investment strategies o Buy and hold o Dollar cost averaging equal dollar investments at regular intervals Short term strategies o Buy stock on the margin half of it is borrowed o Selling short selling sec or commodities contract that was borrowed o Option right to buy sell o Call right to purchase o Put right to sell o Strike price price agreed upon o Option premium amount of money seller receives from buyer o Covered options contract backed by shares of underlying options 14 April 2015 Bonds Ch 13 Lending money to a government or a company loan to business When stocks are down you want to buy bonds Coupon rate interest rate Market value worth if sold today Yield how much will you make from this Most common corporate bond close to tally is flowers bakery Debenture most common debt obligation backed by borrower and documented by indenture o Indenture agreement between issuer of bond bond holder Secured AKA mortgage bonds backed if company goes under Subordinate debentures unsec give a claim secondary to designated bondholders Convertible bonds bonds that can be exchanged for stocks Callable bonds call it back we want you to sell it back to us Spread difference between buying and selling price Zero coupon bonds more volatile tax sheltered held for a long time Government Bonds Extremely secure US is most secure Agency bonds specific areas other than treasury o Fannie Mai Ginnie Mae o Higher risk higher interest rate Registered bond bonds recorded in name of bondholder Municipal bonds munies cities or counties investing in a bridge road or school Federal o Can get a discount for being a resident o Can sometimes be tax free o Tender form application form to purchase US treasury sec online o Treasury bills min of 1K 4 o Treasury Notes 1k to 1m o Treasury bonds 10 to 30 years 1K increments No more HH bonds people were making too much money Government bonds aren t rated Default company cant pay the bond Junk bonds taking a chance o Higher risk potentially higher return o Below BB Laddering buying bonds that mature at different times Investment grade risk of default o A is best want BBB or higher SP1 very strong SP3 speculative Mutual Funds Ch 14 Diversified investments should be more stable Vanguard is one of the most popular Load funds fees attached o Deceptive because there are always fees No load funds pay at end back load fee 12b 1
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